Elastic’s strong net retention rate—close to 130%—is evidence of the upselling strategy’s success

Business Strategy & Outlook

Elastic’s prospects in the full-stack monitoring, security, and search markets looks positive. The firm’s products benefit from secular tailwinds driving an accelerating increase in data for enterprises to secure, search through, and monitor. The firm’s sticky product portfolio, broad swath of products that enable clients to conduct a variety of mission-critical tasks, and increased penetration in the enterprise market have enabled Elastic to form a narrow economic moat around its business. As the volume of data increases, so does its impact on an enterprise’s decisions. More data brings greater complexity, nefarious activity, and search-oriented use cases. This increase in data, and the corresponding complexity, is driven by an uptick in cloud migrations and digital transformations. These secular trends enable a long runway for growth for Elastic. Elastic’s products are critical for its clients as they allow them to gather insights, detect and triage nefarious activity, and improve their IT stack efficiency. While Elastic is well entrenched in search, full-stack monitoring and analysis and security are the key growth verticals for the firm. Elastic has plenty of greenfield opportunities to exploit in these two verticals in the near to medium term. To this end, the firm has been investing heavily in its sales and research divisions, a strategy that is sound. In addition, with different use cases enabled by its three end markets, Elastic has a big cross-selling opportunity ahead of it.

As Elastic lands and expands its customer base, the benefits of the cross-selling opportunity at play. As a client adopts a multiproduct offering, Elastic’s entrenchment in that client’s ecosystem increases. This entrenchment subsequently results in a higher client lifetime value. The firm’s strong net retention rate—close to 130%—is evidence of the upselling strategy’s success. With the ability to consistently add new customers and subsequently upsell them, Elastic has strong long-term growth prospects.

Financial Strengths

Elastic’s financial position is healthy. Elastic ended fiscal 2022 with more than $860 million in cash and cash equivalents. While the firm has since taken on debt of more than $500 million recently, Elastic’s cash generation over the forecast will far outstrip its commitments over the same period. Elastic is to generate strong free cash flow margins, increasing its operating leverage while driving its top line forward. This trend is typical within the high-growth software space as investments in sales and research in the near term reap rewards in terms of durable cash flows in the later years. There’s no material change in Elastic’s capital structure. The firm is to raise capital by either issuing more equity or taking advantage of low interest rates and issuing debt.

Bulls Say

Elastic has strong secular tailwinds as the FSMA and security markets are expected to grow rapidly.
Elastic’s multi prong product strategy, including its search, security, and FSMA offerings, can offer different points of entry into potential clients’ IT ecosystems.
Elastic is competing in markets that are filled with greenfield opportunities.

Company Description

Elastic is a software company based in Mountain View, California, focusing on search-adjacent products. Its search engine allows it to process both structured and unstructured data while gleaning insights from that data. The firm’s primary focus is on enterprise search, observability, and security.

(Source: Morningstar)

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